Preliminary Results

Sorbic International Plc

("Sorbic International" or the "Group" or the "Company")

Preliminary Unaudited Results

Sorbic International plc, (AIM:SORB), the third largest sorbates producer in China, today announces its preliminary unaudited results for the year ended 30 September 2012.

Summary

John McLean, Non-Executive Chairman of Sorbic International, commented: "The Board is pleased that the core business has continued to grow this year, produced a small profit, and is cash flow positive at the operating level. The Board remains focused on resolving its cash flow constraints, as well as continuing to work to seek a conclusion of the negotiations regarding the Inner Mongolia facility, and will update shareholders on this matter in due course."

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Notes to Editors:

Sorbic International's principal activity is the production and sale of the food preservatives Sorbic Acid and Potassium Sorbate from its base in Linyi City, Shandong Province, People's Republic of China. Approximately half of Sorbic International's production is sold to overseas markets, across 46 countries and half into the Chinese domestic market.

Sorbic Acid is a naturally occurring organic compound that is used in all kinds of foods for its anti-decomposition and anti-fungus function and also in grains, medicines, cosmetics, toothpaste, tobacco, animal feed, latex, paper-manufacturing and pesticides. Potassium Sorbate is used to inhibit moulds and yeasts in many foods, such as cheese, wine, yogurt, dried meat, baked goods, cosmetics and pharmaceuticals.

CHAIRMAN'S STATEMENT

Introduction

The period under review has been challenging, and despite the backdrop of ongoing volatility in the market the Group has embarked on an aggressive growth strategy, committing a significant amount of capital to its expansion in Inner Mongolia. It is this strategy that the Board believes has the potential to provide a platform for future growth and to generate positive returns for shareholders in the medium term. The Board remains focused on further improving the Group's operational performance at its Linyi facility and on executing its expansion plans in Inner Mongolia.

The Board is pleased that the 13.9% increase in revenue for the year to £16.8 million underpins the demand for our products, although the small operating profit of £22,000 for the period demonstrates the need for the Group to remain focused and carefully manage its expenditure during the implementation of its growth strategy.

Whilst the Group's existing facility in Linyi continues to perform steadily, the gross margin at this site is currently at only 8.6%; the Board anticipates a significant improvement in margins once the new facility is completed and operational, where the gross margin is expected to increase materially. This would produce a much improved combined margin which, combined with the tax benefits, would significantly improve the overall profitability of the Group.

The plant in Linyi is operating at full capacity and due to operational efficiencies has produced an additional 437 tonnes, representing a 7% efficiency improvement; additionally the selling prices of both of the Group's products have improved marginally, although not sufficiently to offset price increases (8%) in the Group's principal raw material, Crotonalderhyde.

The sales mix is becoming more focussed on both China and the US, which now account for approximately 77% of turnover and following closer cooperation with Apac, the Group's US distributor, in Spring 2012, the level of US business has increased from a running rate of 24% to 31% of turnover, which bodes well for the future, especially in respect of future additional capacity once the new facility in Inner Mongolia is completed.

Included in the Group's balance sheet is approximately £8.6 million of assets, which continue to be carried at cost on the assumption that the Company will receive reimbursement for its Inner Mongolia facility.

Inner Mongolia facility

As previously announced, the Group has been severely impacted by the notification to cease construction in order to make way for a new passenger railway terminal which will be linked to Beijing.

The Company has sought diplomatic support from the UK's embassy in China to help in reaching a satisfactory settlement.

In addition to the overarching understanding that the Company will not suffer any financial loss as a result of the rezoning process, the following specific principles have been established:

·; The Company has been offered land on an adjacent site only 0.5 km away from its existing site. The land will be of approximately half the size of the site of the current facility (approximately 200 mu (13.33 hectares) rather than 400 mu (26.67 hectares)), and the Company should be reimbursed the proportion of costs already incurred for the land, which equates to approximately £800,000. The Board is satisfied that the remaining land is sufficient for the Company's requirements

·; The Company will receive compensation for the costs incurred in terms of construction, relocation, inflation and interest

·; In respect of the costs incurred in construction of the manufacturing facility, an independent valuer (acceptable to both parties) will be appointed to appraise the construction cost. The Company is concurrently obtaining third party quotes for the rebuilding of the facility, which will be compared against the independent valuer's appraisal.

Additionally the local authorities have agreed to offer a loan to the Company to enable Sorbic International to commence construction as soon as the details of the compensation package are finalised. It is anticipated that drawdown of this transitional loan, on which terms are yet to be finalised, will enable the Company to commence construction of the new factory in H1 2013. Based upon an H1 2013 start to the construction work, the Board anticipates that the facility should become operational in spring 2014. On the basis of these discussions, the Board does not believe that any impairment has occurred in the carrying value of the underlying assets connected with the facility.

Timing is currently not confirmed but the Board expects further clarity on this in Q1 2013. To aid the Board in its negotiations, apart from having direct contact with the officials in Ulanqab, the Company has appointed Chinese advisers to assist in the resolution. Whilst the Board remains confident of a satisfactory final outcome for the Company, it should be noted that significant costs are currently being incurred in the pursuit of a resolution.

The Board is pleased that the authorities have been transparent and balanced throughout the negotiations and looks forward to the successful conclusion of the discussions.

The Group has already invested £4.8 million in equipment, which will be reused once construction of the new facility is completed.

Loan notes

Against this background, the Company will seek to renegotiate the terms of the loan notes totalling £2.4 million, which are due for repayment in February 2013.

The Group has £4.1 million at bank in China, and this cash position is more than adequate for working capital purposes for the existing operations. However the Company will require further funds, both for completing the Inner Mongolia facility and meeting the costs of Sorbic International plc, the AIM listed entity. Due to the difficulties in transferring funds out of China, it is unlikely that the Company will be able to make the interest payment on the December loan stock until the capital structure has been resolved or the Company has raised additional capital.

Board changes

The Company also announces that Nicholas Smith has decided to step down as a Non-Executive Director of the Board with effect from 1 January 2013, due to personal and other commitments. However, I am pleased to confirm that Nick will remain available to the Board to consult on matters going forward if required. The Board is actively seeking another Non-Executive Director to bring additional skills to the Board and will update the market in due course.

Going concern

Whether the Group have sufficient resources to continue in operational existence for the foreseeable future will ultimately be dependent on the outcome of discussions with the loan note holders / shareholders and the successful conclusion of the Inner Mongolia compensation negotiation. Irrespective of the outcomes achieved, the Company will need to transfer funds out of China or raise additional capital to meet ongoing costs of the Company. Without additional funding or a transfer of monies from China, Sorbic International plc will not have sufficient resources to meet its obligations as they fall due.

Economic outlook for 2013

China's economic growth is forecast to reach 7.7% in 2012 with at least a similar level of growth for 2013 and 2014. Despite the slowing pace of expansion in China, growth in Asia is likely to be strong given falling inflation, healthy government balance sheets and the availability of multiple policy tools to boost growth and the continued domestic demand supporting economic activity in the region.

On the immediate economic front, inflationary pressures have eased substantially, particularly in China, and central banks across the region have cut their benchmark rates of interest to stimulate growth. This is likely to be beneficial to the Company's sales in FY2013.

In the face of these challenging markets, the Group has increased focus on its larger and more established clients with clearer long-term visibility of earnings.

Operational outlook

The Board will continue to focus on improving operational efficiencies at its Linyi facility, as well as concluding its negotiations and commencing construction at the new Inner Mongolia site, which is expected to underpin future growth. Despite the market volatility, demand for the products remains robust and the Board has confidence in its stated strategy for medium and long-term growth.

John McLean

Chairman

20 November 2012

Unaudited Consolidated Statement of Comprehensive Income

Unaudited Consolidated Cash flow statement

For year ended 30 September 2011

Notes to the financial information

1. General information and principal activities

The Group's principal activities include the production and sale of food preservatives, Sorbic Acid and Potassium Sorbate. The Group's main operations are in the People's Republic of China ("PRC").

The Company, Sorbic International Plc, a public limited company, is the Group's ultimate parent company. It is incorporated and domiciled in the United Kingdom. The Company's registered office is 17 Hanover Square, London W12 1HU and its shares are listed on the AIM Market of the London Stock Exchange

2. Basis of preparation

The Group's financial statements for the year ended 30 September 2012 will be prepared in accordance with International Financial Reporting Standards as adopted by the European Union ("IFRS").

The accounting policies adopted by the Group are consistent with those of the previous financial year except in the current financial year, the Group has adopted all the new and revised standards and Interpretations of IFRS that are effective for annual periods beginning on or after 1 October 2011 and as outlined below. The adoption of these standards and interpretations did not have any effect on the financial performance or position of the Group and the Company.

Going concern

The preparation of financial information requires an assessment on the validity of the going concern assumption. The validity of the going concern assumption is dependent on finance being available for the continuing working capital requirements of the Group and finance for the development of the Group's projects becoming available. 

As discussed in the Chairman's Statement, the following key areas impact on the going concern basis:

The successful resolution of the ongoing discussions with the local authorities in Ulanqab City, Inner Mongolia

The Company's requirement for either further equity fund raising or the transfer of funds from the Chinese operations in order to meet its ongoing costs.

The Company has convertible loan notes which mature on 26 February 2013. The repayment, conversion or renegotiation of the loan notes is dependent on matters such as the performance of the Group and the successful conclusion of the points highlighted above in respect of the plant in Inner Mongolia. 

In approving this financial information, the Board has recognised that the combination of these circumstances creates a level of uncertainty. However, having made enquiries and considered the uncertainties outlined above, the directors have a reasonable expectation that the Company and the Group have sufficient resources to continue operational existence for the foreseeable future.

Accordingly, the Board believes it is appropriate to adopt the going concern basis in the preparation of the financial information.

Whilst the financial information included in this preliminary announcement has been computed in accordance with IFRS this announcement does not itself contain sufficient information to comply with IFRS. The Company will publish full-consolidated financial statements that comply with IFRS by the end of March 2013.

3. Segmental information

Segment information is presented in respect of the Group's geographical and operating segments. The Group's operating segments are as follows:

(i) Sorbic acid

(ii) Potassium sorbate

(iii) Head office and other adjustments, which incorporates a measure of assets and liabilities not included in the other segments

Year ended 30 September 2012

Year ended 30 September 2011

4. Income tax expense

* The Company is subject to a United Kingdom Tax rate of 28% from April 2008. No tax provision is provided at the Company level, as all current profits are foreign derived income.

The Company's subsidiary Honour Field International Limited is a BVI registered company and has tax-exempt status.

The Company's subsidiary Linyi Van Science and Technique Co., Limited ("LVST"), is subject to a PRC Enterprise Income Tax rate of 25% (2011: 25%).

The tax charge on profits assessable has been calculated at the rates of tax prevailing in China, in which the Group through its China subsidiaries operate, based on existing legislation, interpretation and practices in respect thereof.

Deferred income tax assets are recognised for tax loss carried forward to the extent that the realisation of the related tax benefit through the future taxable profits is probable. The Group did not recognise deferred income tax assets of £639,724 (2011: £450,048) at the year-end in respect of losses amounting to £2,284,727 (2011: £1,607,314) that can be carried forward against future taxable income since future profits were not considered probable.

5. Earnings per share

Basic

Diluted

Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Company has two categories of dilutive potential ordinary shares: share options and convertible loan notes. For the convertible loan notes, a calculation is done to determine the number of shares that could have been acquired based on the monetary value of the subscription rights attached to outstanding share options and convertible loan notes. The number of shares calculated as above is adjusted for the number of shares that would have been issued assuming the exercise of the convertible loan notes. The contingently issuable shares included within the share options and convertible loan notes are anti-dilutive and are not included in the calculation.

6. Convertible loan notes

The convertible loan notes were issued on 27 August 2010 and 25 February 2011. The notes are convertible into ordinary shares of the Company at any time between the date of issue of the notes and their maturity date of 26 February 2013. The loan notes are convertible at £0.26 per share. The effective interest rate used to calculate the interest charged to the income statement was 12%.

If the notes have not been converted, they will be redeemed on their maturity date at par. Interest of 10 % per annum will be paid biannually up until that date.

The net proceeds received from the issue of the convertible loan notes have been split between the liability element and an equity component, representing the fair value of the embedded option to convert the liability into equity of the Group as follows:

The directors estimate the fair value of the liability component of the convertible loan notes at 30 September 2012 to be approximately £2,310,412 (2011: £2,267,881).

7. Share capital

The movement on the share capital account was as follows:

The principal amount of the convertible loan notes issued on 27 August 2010 and 25 February 2011 can be converted into such number of new fully paid ordinary shares of the Company at a conversion price of 26 pence per share at any time up to the final redemption date of 26 February 2013. As at 30 September 2012, 9,376,923 ordinary shares are reserved for issue. No conversion took place during the year.

The movement on the share premium account was as follows:

Costs of £79,792 were incurred in FY2011 for the issuance of new shares while £112,798 was reversed out when the Company derecognised the amount due to Hermes Capital during the year.

8. Non-statutory financial information

The financial information set out in this preliminary announcement does not constitute the Group's statutory financial statements as defined in Section 435 of the Companies Act 2006 for the years ended 30 September 2012 and 2011.

The financial information for the year ended 30 September 2011 is derived from the statutory financial statements for that year prepared in accordance with IFRS, which have been delivered to the Registrar of Companies. The auditors reported on those financial statements; their report was unqualified, did not draw attention to any matters by way of emphasis without qualifying their report and did not contain a statement under Sections 498(2) or (3) Companies Act 2006.

The audit of the statutory financial statements for the year ended 30 September 2012 is not yet complete. These financial statements will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the Company's annual general meeting. The auditors have indicated that in view of the Company's need to seek to renegotiate the terms of the loan notes, the requirement for additional capital or the transfer of funds from China, and the ongoing Inner Mongolia compensation negotiation, the auditors report may draw attention to these matters by way of emphasis in connection with the assessment of going concern, without qualifying their report.

The directors do not propose a dividend in respect of the year ended 30 September 2012 (2011: nil).

The Board of Directors approved this announcement on 20 November 2012.

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